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Monday, 21 May 2012

Economic reforms in Myanmar: First things first...

မြန်မာ့စီးပွားရေး ပြုပြင်ပြောင်းလဲမှုများ အပေါ် စာရေးသူ၏အမြင်

The political and economic reform processes in Myanmar may have looked breathtaking for outsiders who used to see the country as a rogue state ruled by a military junta, which was once dubbed as one of the six outposts of tyranny. Now, most of the international organisations have hailed the reform process led by the former generals as the Burmese spring. The international business community is also excited about the potential investment opportunities brought about by recent economic and currency reforms. An official from the Asian Development Bank even described these opportunities as Myanmar gold rush.

Recently, Professor Findlay of Columbia University warned that the influx of foreign investment engender a danger of over appreciation of Myanmar currency under the recently introduced managed floatation regime. It is true that Myanmar Kyat has appreciated about 40% since 2009. If careful and calculated preventative policies were not in placed, recent reforms would push the appreciation of Myanmar Kyat further up. This will have a huge negative impact on the Myanmar’s very fragile, primitive, inexperienced and uncompetitive export industry.

The appreciation of Myanmar kyat, in theory, should lead to higher purchasing power of the currency and, hence, a lower inflation. If this has been the case, the positive impact of increase in consumption expenditure induced by lower price level might have partly offset the adverse impact of decline in the country’s exports due to the exchange rate appreciation. However, the inflation rate is still double digits in Myanmar. In fact, the consumers in Myanmar do not see the benefits of lower prices of imported necessary products such as fuel and cooking oil because of the market frictions caused by high transportation costs, inefficiencies in distribution system and lack of transparency and widespread nepotism in awarding import permits for these essential products. It has been widely acknowledge that the prices of some basic foodstuff in Yangon are higher than those in Singapore, which is ranked as the Asia’s second most expensive city.

If the Monetary Authority of Myanmar is willing to intervene the foreign exchange market to ease the pressure on appreciation of Kyat, they need to increase the supply of Myanmar currency in order to satisfy the growing demand for it. As a result, there will be a high probability of further increase in inflation. Therefore, it is important to implement carefully formulated policies. The government should use incentives to channel foreign direct investment into upgrading the country severely underdeveloped infrastructure and restrict the FDI inflow into other non-productive and mineral resources sectors. It is also important to make sure that the ordinary citizens benefit from the increase in liquidity. This will lead to an increase in consumer demand, which in turn will encourage more investments in real sectors. At the moment, the government policy seems to be leading to the opposite direction. Recently, for example, a few well connected companies, which have helped developing the country’s mobile phone infrastructure in collaboration with the Ministry of Post and Telecommunication, are selling mobile sim card at the price of 0.25 million Kyat (US$300); probably the highest price for a mobile phone line in the world. Such policies will inadvertently lead to a flow of Kyat from the ordinary citizens into the government’s coffer and well connected companies’ purses. This will lead to a substantial decrease in liquidity as well as the consumers spending power. In a developed economy, all these factors are likely to pull down the inflation. However, the problem of inflation in Myanmar is not due to excessive demand. It is due to the supply side problems arising from lower productivity, inefficient production methods, high transportation costs, lack of infrastructure, and above all rampant corruption. Recently, the authority announced a quota system in electricity supply to industrial zones due to shortages of power supply. According to the Voice Weekly, factory owners complained that they have had to rely on their own generators for electricity and the production costs have increased up to six folds.

There is no question about the importance of recent currency and economic reforms. But these reforms will not be enough to cure the chronic illness of Myanmar economy. The clear and present danger is lack of fundamental institutional reforms to tackle the above mentioned supply side problems. Before these fundamental reforms are in place, any attempt to fix Myanmar's economy would be similar to replacing an old thatch roof with modern ceramic roofing tiles without strengthening the foundations and skeleton of an old house. There is a danger of the whole house collapsing due to the weight of new roofing tiles.

(This is my commentary circulated within the department for discussion on 14/04/2012. Comments and critics are welcomed.)